Web sites can help plan for retirement 12:31 PM C ST on Monday, February 28, 2005 By PAMELA Y IP / The Dallas Morning Ne ws They're all over the Web – financial calculators that help figure how much you need to save for retirement. But do they provide good advice? Experts say that while they generally are helpful, online retirement calculators can trip up consumers. A retirement calculator that asks how old you a re and estimates how much you have to save isn't very helpful, says Conrad Ciccotello, director of personal financial planning programs at Georgia State University in Atlanta. At the other extreme are exasperating calculators that ask endless questions. Most people are looking for basic guidance, says Rob Nestor, a principal in the Retiree Services Group at the Vanguard Group. "They just want a ballpark, simple, easy-to-get-to answer. Am I basically on track?" There are two key caveats with online calculators: •One, it's garbage in, garbage out. "There are too many variables and data inputs," says Bryan Clintsman of Clintsman Financial Planning in Southlake. "The user of an online retirement calculator has to know not only the answers but also the right questions to ask." •Two, they can help consumers with a typical retirement situation, but they miss the mark for those with more specialized needs, such as the self-employed. "If you're a middle-income or upper- middle-income individual or family and you have a standard case, the Web is a pretty reasonable resource," Mr. Ciccotello says. "If you're nonstandard, forget the Web." Here's what it comes down to, says Mr. Ciccotello, who co-authored a study on financial advice on the Web: "There's all this free advice out there. Which free lunch is worth eating?" Financial advisers often try to prod their clients into action with the observation that most people spend more time planning their vacation than their retirement. RIC KY MOO N / Spe cial Contributor Online retirement calculators give you ‘a reference point on where you are on your projected withdrawal rates, whether your investments are going to be adequate to fund your retirement,’ says Dave Perkins, a retired electrician in Keller. It worked on Dave Perkins. "That really hit home with me, because I realized that I hadn't put a whole lot of thought into my retirement," says Mr. Perkins, 59, a retired electrician in Keller w ho now works part time selling home-improvement products. As part of his new approach, he tracks his retirement goals with the help of several online retirement calculators. "It gives you a reference point on where you are on your projected withdrawal rates, whether your invest ments are going to be adequate to fund your retirement," says Mr. Perkins, who has become something of an expert on calculators. While the free online tools generally are helpful, they should be used only as a guideline and not as the last word on retirement planning. A bad calculator, bad data from the user and bad assumpt ions about future returns and inflation can lead you dow n the wrong path. And people in some situations shouldn't use them at all. "The calculators aren't designed to take into account specialized situations like extended care in a nursing home," says Kevin O'Fee, managing director at New York Life Invest ment Management LLC in Parsippany, N.J. "Those aren't within the scope of these calculators." Garbage in? Online calculators are only as good as the person using them. You have to have some idea of what your retirement needs are before inputting the data. "If you're starting with the wrong question, the answers aren't going to be necessarily helpful," says Steve Mitchell, director of retirement marketing at Merrill Lynch in Princeton, N.J. For example, most calculators ask you to estimate your life expectancy. With today's medical advancements and healthier lifestyles, it's very possible that you'll spend 20 years in retirement. "It pays to overestimate your lifespan, rather than underestimate it," says Greg McBride, senior financial analyst at Bank rate.com, a consumer finance Web site. "If you overestimate your lifespan, there's a chance that your money will outlive you. If you underestimate, then you may end up living longer than your money." Your expenses Likew ise, don't underestimate your expenses in retirement, although the common belief is that expenses will fall in retirement. "Your [health] insurance expenses may go up because your retiree insurance may not be as good as your working insurance," Mr. Per kins points out. "You need to realize that your expenses in some areas are certainly going to be more." Be careful about the assumptions that retirement calculators make, because they may not be realistic. "In all of these retirement calculators, there are some return assumptions built in," says Peng Chen, chief invest ment officer at Ibbotson Associates in Chicago, an invest ment consulting and research firm. "One should look at how much was assumed in there and was that realistic, was it too high, because return is the No. 1 determinant of portfolio performances in the future." Some calculators might default to the long-term average stock market return of 10 percent. But many experts say that is unrealistic, at least for the next few years. Another conc ern: Do the calculator's built -in returns take into account the ups and downs of the stock market? "That reflects how the model handles the risk of the portfolio," Mr. Chen says. "If they assume returns are constant each year, then they're not taking the risks of the market into consideration. "The constant returns show you the average outcome of the portfolio, but the market is anything but averages." Consider inflation Inflation is also a major component that you must take into account because it dilutes your purchasing power, something you really can't afford in retirement. "Calculators that ignore inf lation are dangerous," says Conrad Ciccotello, director of personal financial planning programs at Georgia State University in Atlanta. Some calculators will ask you to enter assumptions on both inf lation and return, in which case you really have to be careful not to be overly optimistic. "One of the most difficult aspects of retirement planning is know ing the numbers and trends of the many data inputs," says Bryan Clintsman of Clintsman Financial Planning in Southlake. "For example, what inflation rate are you going to use – that of the past 70 years (3.1 percent), or of the last 35 years (4.6 percent)? "What are you going to include for Social Security? What about health care and long- term care costs? What about the choice of taking your retirement as a lump sum or annuity?" More than one Just as you shouldn't put all your financial eggs in one basket, don't rely on just one calculator. "You should use two or three of them," says Mr. Perkins, who added that he looks at "at least half a dozen" calculators. "If they're all telling you pretty much the same thing, you're pretty much in the ballpark." If your retirement needs are complex, the calculat ors don't provide the last word. "The more complex a person's financial situation and the more unique or multiple options that somebody's considering, the more they need a financial adviser to help them look at the different possibilities and the financial impact," says Merrill Lynch's Mr. Mitchell. "People aren't just going from a full-time working career into a full-time leisure retirement and living off their retirement assets. Most retirement involves a period of leisure and working back and forth, and that really changes the financial equation." If you're going to a financial adviser, use a retirement calculator as a guideline and supporting data to work with your adviser. An adviser can ask you key questions that would help you gain more insight into your retirement goals – something that most calculators can't do. "The typical planning tool asks when do you expect to retire," Mr. Mitchell says. "That's really the wrong question. "The question should be, how do you envision your retirement?" E-mail email@example.com HOW TO GET STARTED Here's what you need to know, or estimate, before using a retirement calculator: Your pretax income. Check your last pay stub of the year. An estimate of your Social Security benefits at retirement from the annual statement the Social Security Administration sends you. Call 1-800-772-1213 or go to www.ssa.gov. An estimate of your pension income, if any, from your employer. How much you've saved for retirement. How many years you are from retirement. Your age and your best guess at life expectancy. If you're married, this same info about your spouse. SOURCE: Vanguard Group WHAT'S AVAILABLE Here are some online retirement calculators and retirement planning tools. It's good to sample several. www3.trowe price.com/ric/RIC This is the retirement calculator of mutual fund firm T. Rowe Price Associates. The calculator uses a sophisticated computer modeling called "Monte Carlo Analysis," named after the games of chance in the casinos of Monte Carlo, Monaco. Many invest ment experts and financial advisers like the Monte Carlo method because it shows you how much income you could get from your savings under different financial market conditions. flagshipp.vanguard.com/VGApp/hnw/RetirementSavings The Vanguard Group offers several retirement calculators, including this one, which helps you figure out how much you should save for retirement. flagshipp.vanguard.com/VGApp/hnw/AffordingRetirement This Vanguard calculator helps you decide whether you can afford to retire. www.bankrate.com/brm/savings-advise rs/need-to-retire.asp Bankrate.com, which tracks consumer interest rates and consumer finance issues, operates this calculator. It helps you decide how much money you will need to retire. www.bankrate.com/brm/savings-advise rs/retirement-goal.asp This Bankrate.com calculator helps you figure out how to reach your retirement goal. personal.fide lity.com/retirement/?ba r=c Fidelity Invest ments' Retirement Income Planner can be used by Fidelity clients, but nonclients can contact a Fidelity representative, who can use the tools to walk them through various personal retirement scenarios. The planner uses the Monte Carlo method. askmerrill.ml.com/html/mlrr_home_flash/# Merrill Lynch's Retirement Illustrator aims to take into account an increasingly common "transition phase" that retirees will go through – leaving their lifelong career but continuing to work in retirement on their own terms.
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